As many as10 million savers could have their retirement funds decimated and be forced to work beyond retirement age as major pension providers are switching their money into higher risk investments.
Following the introduction of the Government's new pension freedoms last year major insurers including Aviva, Aegon and Scottish Widows are revamping savers' investments in a bid to improve their retirement prospects.
But it has emerged that the new-style funds could leave millions of savers vulnerable to losing large sums just before they plan to retire.
- The hidden reason for denying pension freedoms
This is because they assume that savers can now afford to hold racier investments in the years close to their retirementas a result of usingbank-account pensions to leave their money invested for years and drawing an income.
But figures from the Financial Conduct Authority (FCA) show most savers are not leavingmoney invested and can therefore not afford to hold risky investments, which could suddenly fall in value at any time.
Instead two thirds of people using the pension freedoms are cashing in 100pc of their fund in a short space of time, while 13pc of savers are using funds to buy guaranteed income in the form of an annuity.
Last night experts warned savers choosing these options face "unpleasant" consequences if their money is left invested in a higher-risk fund and stock markets fall in the later years of their working life.
Nathan Long, a senior pension analyst at Hargreaves Lansdown, a pension firm, said: "If a saver's fund value drops significantly near retirement age and they were planning to cash in the money or buy an annuity, they may have to wait years for it to recover in value. This could mean working longer than planned which is clearly an unpleasant position to be in."
The new funds will see up to 38pc of people's life savings invested in equities, the riskiest type of asset, in the years leading up to retirement. Insurers believe this strategy will give most people the best chance of having the biggest pension.
Previous arrangements were specifically designed to minimize the chance of losing money just before retirement, by investing in ultra-low risk assets such as bonds and cash.
Customers will be notified in writing before they are automatically placed in one of the new, riskier funds, and will have the option to move their money into safer funds if they know they are going to cash in funds or buy an annuity.
The insurers, which have around 10 million customers between them, defended the plans claiming that special mechanisms were being put in place to protect savers from sharp movements in the value of their investments.
Nick Dixon, investment director at Aegon, said:“Within five years advisers estimate only 25pc of people will look to purchase an annuity at retirement. The dramatic shift in investor behaviour means traditional lifestyle funds which target an annuity by moving into long gilts no longer serve ‘typical’ workplace investors."
A spokesman for Aviva said: "When there is a change in legislation it is good practice to review default investment solutions to make sure they are still appropriate. As pension freedoms have changed the way in which people take their pension benefits, we no longer think that an annuity focus is the best solution. People now have a wider range of options at retirement, so our new solution aims to provide an asset mix that is appropriate to a range of retirement options."
A Scottish Widows spokesman said: "We will be contacting people 15 years from their retirement date to give them plenty of time to switch into the most appropriate for their circ*mstances. We are investing heavily in digital capabilities which will enable us to engage regularly with customers on this topic to ensure they understand their options and what it means for them."
Has your pension provider done something you don't like? Email: katie.morley@telegraph.co.uk
Will my pension money be moved into a new-style higher-risk investment fund?
If you're less than five years from retirement age then it's unlikely. But if you have more than five years remaining in work then it is likely. If you are affected you will receive a letter informing you that your money is being moved into a new type of "default fund".
What should I do if I receive a letter?
If you've got more than 15 years to go until retirement then you probably don't need to do anything. You also need not take action if you're close to retirement and you are planning to leave your money invested. The new style-funds may actually be best for growing your pension over the longer-term. However if you have plans to buy an annuity or cash in all or most of your fund, you should consider asking for your money to be placed into a fund which carries a lower-risk of losing money.
I don't have my retirement plan figured out. What should I do?
If you're over 50 you can take advantage of the Government's free pension help service, PensionWise, where an adviser will walk you through your options. If you're still unsure you could consider paying to take financial advice from a regulated adviser.
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